Set to true to modify MongoDB to use a smaller default data file size.Specifically, smallfiles reduces the initial size for data files and
limits them to 512 megabytes.The smallfiles setting also reduces the
size of each journal files from 1 gigabyte to 128 megabytes.

Alternatively you can run mongod with --smallfiles parameter like:
mongod --smallfiles

On my machine the problem was different. It was expecting a directory /var/lib/mongod with proper permissions, which was not there. The solution is simple:

sudo mkdir /var/lib/mongod
sudo chown -R mongod /var/lib/mongod

However how did I find out about the problem(s) in the first place. Again the solution is very simple. I looked in the log file: